Friday, March 19, 2010
Does the investment proposition to the left look attractive to you? Picking pennies up off the street ahead of an onrushing (OK, oncrawling) steamroller? If the past few years have demonstrated anything, its that while such a strategy can work on occasion, those who get greedy and stay for the last few pennies will eventually get flattened.
It seems as if this year, many (though by no means all) of the more popular profitable trading strategies have involved picking up pennies in front of the proverbial steamroller. The fabled front-end roll-up trade, discussed in this space on several prior occasions, is a prime example.
The more he looks across markets, the more that Macro Man feels that the re-introduction of some sort of risk/term premium into markets is probably overdue. To rely on central banks to cover your hide forever is, ultimately, just asking for a head-on confrontation with the steamroller.
The Swiss, as many FX punters know from bitter experience, are a prime example. It was little more than a year ago that the SNB got stuck into EUR/CHF like a piledriver, engineering a 4% rally in one heady day. And that was basically it. Presumably after some behind-closed-doors yelping from the ECB, the Swiss almost immediately pulled back to a "buy the dips" intervention style which lasted around nine months.
While this wasn't great for big-picture directional guys like your author, it at least provided a platform for range-traders, who could lean on the SNB bid at 1.51....until they couldn't. EUR/CHF has tumbled hard over the past three months since the SNB pulled the bid, turning into a startlingly volatile pair. The (presumably) final nail in the coffin came yesterday evening, when new SNB board member Danthine said that firms should prepare for higher rates and market-determined FX rates. Yowsah!
The December euroswiss contract current prices in 3m LIBOR at 0.63% from year end, up nicely from the current reading of 0.25%. While Macro Man doesn't really think that they'll put rates up over the course of the year, the chart looks perched on the edge of a precipice, having already shed some 20 ticks from the highs.
All of which brings us back to the US. Bloomberg carries a story suggesting that the discount rate could rise again ahead of the next FOMC meeting as part of the (cough, cough) "normalization" process. Meanwhile, it seems as if Macro Man isn't the only one scratching his head and wondering why 3m LIBOR is still hugging the top end of the FF target band. After 5 months of the kind of flatlining that would make PBOC proud, LIBOR has begun to slowly tick higher.
Could that rumbling be the sound of Jake firing up the steamroller? Hmmmm. Macro Man cannot help but observe that the latest rally, in which the financials have participated heartily has a) offered no real threatening price action to challenge weak longs, and b) come in the context of weak volume.
Calling turns is famously difficult, and Macro Man knows better than to try and stand in front of a risk-asset...err....steamroller. That doesn't preclude booking profits on longs however, which to his eye looks like a prudent way to avoid a head-on collision with the steamroller moving the other way.